Company regulatory legislations in India

Introduction :

India being a democratic country, so the main objective is to reduce the concentration of the wealth in the few hands. So to prevent these things Govt. has enacted special legislation within which a business should operate. It is essential for the business houses to understand the legal environment & work accordingly.

Legal environment refer to the rules & regulation framed by the govt. within which the business is to run. Govt. makes law for the smooth functioning of the business & to safeguard the interest of consumers, workers. These legislation effect the business form starting to the winding up of business

Some important enactment to regulate the industry in India are:

1) The industrial development & Regulation Act, 1952.2) The companies Act, 1956.3) The Indian Patent Act, 1970.4) MRTP Act, 1969.5) The Foreign Exchange Regulation Act, 1973.6) The Consumer Protection act, 1986.7) The Security & Exchange Board Of India (SEBI), 1992.

1) The industrial development & Regulation Act (IDRA), 1952 :

The IDRA act was passed in 1951, but came into force in 1952. the main objective of this act was to increase the control the govt. over the industry through Industrial licensing. The main point of the act are as follows :

a) To ensure balanced economic growth & development.b) To regulate the direction of industrial development.c) To prevent the monopoly in the industry.d) To protect the small scale industry from big industry.e) To effectively implement the industrial policy of the country.f) To ensure the industrial growth, development & production

according to the planned priorities.

Main Provisions of this act :

1. Development Measures : The IDR act provide the establishment of Central advisor

council, consisting of representatives of industrial undertaking, employees, consumer, public supplier etc for advising the Central govt. on matter related to industrial development.

It also provide the establishment of Development Council consisting of members representing the interest of owners, employees, consumer etc & person having special knowledge of the matter of technical aspect ,for recommending measure for the improvement of the performance of industry.

2. Regulation of entry & growth : The IDR act empower the govt. to regulate the industrial

growth by industrial licensing with some exemption as decided by the govt.

3. Supervision & Control : Govt. can make full investigate , if it of the opinion that a) if any schedule industry show fall in the volume of output

or fall in the quality of output or unjustifiable rise in the price.

b) if any schedule industry is managed in a manner highly detrimental to the industry.

For the purpose of ascertaining the position of working of any industrial undertaking, any person authorized by central govt. can :

a) Enter or inspect any premisesb) Order the production of any document, book, register.c) Examine any person having the control or employed.

4) Take over of management : Under the IDRA govt. can take control over the

management of the undertaking completely or partially which fail to work in the direction mention in the act.

Govt. can also take control over the management if govt. found that undertaking is working or managed in highly detrimental to the scheduled industry concerned to public interest.

Govt. can also take control over the management under liquidation, with the permission of High Court.

5. Price Distribution : For securing the equitable distribution & fair prices of any article of scheduled industry, the central industry is empowered by the act to control supply, distribution & prices.

6. Exemption : The central govt. is empowered to exempt any industrial undertaking from any of the provision of this act in certain cases in the public interest.

2. The companies Act 1956 :

The company law is the main law effecting the management, organization & administration of business. The Companies act contain all the provision from formation of the company till its closure. The act provide the formation, classification, registration, raising of funds etc.

Objectives :a) Full & fair disclosure of all the information related to

company.b) Effective participation by shareholder & also the protection of

their interest.c) Enforcement of proper duties by company management.d) Power of intervention & investigate into the affair of the

companies.

The common objective of this act is to regulate all private investment for the welfare of the society & to protect the interest of the investors.

Classification of Company :

Section 3 (1) (i) of the company act says that “a company means a company formed & registered under this act or an existing company”

Company act deals with following type of companies:

• Limited Companies • Guarantee Companies• Unlimited Companies

Company Formation :

Company formation is a elaborate, time consuming & expensive affair. Company formation involve 3 steps1. Registration2. Capital raising3. Commencement of business

1. Registration : The registrar of the company is the official registrer of

the company. Before registration, the registrar expect the promoter to submit the list of names of the proposed company, memorandum of association, article of association & list of directors.

2. Raising of Capital : Raising of capital raise the capital from shares or through other means. It involve following steps :a) Getting SEBI clearanceb) Entering into agreement with the underwriterc) Inviting the public to subscribe to its share capitald) Allotment of shares

3. Commencement of business : A private company can immediately commence its

business after it is incorporated but public company can start the business only after getting the certificate for the purpose. To the certificate following statement has to be submitted :

a) A deceleration that minimum subscription has been receivedb) A deceleration that director has taken the qualification share &

paid for it.

c) A certificate issued by a director to the effect that all the condition has been fulfilled.

The registrar then issue a certificate to commence a business. It is said that as many as 21 clearance are required before starting the business.

Winding up of Companies : The winding up of a company may be either :d) By a national company law tribunale) Voluntary

Circumstance in which company may be wounded by the tribunal :

a) If the company has, by special resolution, revolved that company be wounded by the tribunal

b) If default is made in giving the report to the registrar or in holding the meeting

c) If the company does not commence its business within the year of its incorporation

d) If the number of its member is reduced, in public company below 7 & in private company below 2

e) If company is unable to pay its debitf) If tribunal is of the opinion that it is just equitable that company

should wound upg) If a company made default in filling with the registrar its balance

sheet

Circumstance in which company may be wounded by the voluntary :

a) When the period fixed for the duration of the company by the article has expired

b) If the company passes the special resolution that the company be wounded up voluntary

MRTP Act 1969 :

MRTP act stands for The Monopolies & Restrictive Trade Practices Act 1969. to protect the concentration of economic power in the form of capital, income & employment in the few hands govt. passed this law.

Objectives :i. Controlling monopolistic trade practicesii. Regulating restrictive trade practices

Scope of the act section 3 of the act says that unless the central govt. by

notification in the official gazette direct the act shall not apply to:

a) Undertaking owned & controlled by the govt.b) Trade union & other association of the workerc) Financial institution

Main provision of the act :1. Conc. Of the economic power to be prevented : the declare that following type of undertaking should be

regulate to prevent the conc. Of economic power :a) Has assets size of 20 crore or moreb) An undertaking which control 1/3 or more of the total

production or supply of any goods & has asset of Rs. 1 crore

2. Monopolistic trade practices section 2 of MRTP act define monopolistic trade practices

as a trade practices which has or likely to have effect ofi. Maintaining prices of the good at unreasonable low level for

limiting reducing the productionii. Unreasonable preventing competition in production & supply

of the goodsiii. Limiting technical development & capital investment to the

common detrimentiv. Increasing unreasonable the cost of production of any goods or

servicev. Increasing unreasonable price of the goods or asking for

unreasonable profit

3. Restrictive trade practice Section 2 of the act defines restrictive trade practices as

a trade which has or have the effect of preventing or preventing competition in any manner

i. Which tend to effect the free flow of resource or capital for the production

ii. Which tend to bring manipulation of prices or delivery or supply of goods in the market

Monopolies & Restrictive trade practices commission(MRTPC) The MRTP act has set up a permanent body known as

MRTPC. It is headed by chairman & has 2 to 8 members all these are appointed by the central govt. MRTPC can intiate inquiry against MTP at the order of central govt. & to inquiry against RTP & UTP it has the power of civil court.

Foreign Exchange Regulation Act, 1973 : The Foreign Exchange Regulation act 1973 was the main instrument for controlling the operation of foreign controlled companies in India. This act was enacted to conserve & restrict the use of foreign exchange resource, very strict check & control was imposed on the transaction involving foreign exchange movement.

ObjectiveThe main objective was to prevent outflow of Indian currency & to maintain check on inflow of foreign exchange.1) To regulate payment to be made in the international market.2) To regulate the dealing in foreign exchange & transaction which

affect foreign exchange.3) To regulate import & export of currency4) To conserve the foreign exchange resource of the country5) To regulate foreign companies

Main provision of the act 1) RBI may authorized any person to deal in foreign exchange &

can also revoke the authorization.2) RBI may authorized some person to act as money changer3) No person expect money changer will deal in foreign exchange4) Restriction on payment without the permission of the RBI5) Restriction on the import & export of any currency without the

permission of the RBI 6) No person without the permission of the RBI shall acquire,

hold, dispose of the foreign security7) No person without the permission of RBI shall acquire or hold

or gift any immovable property outside the country8) Restriction on establishment of any branch of business in India

for carrying out any activity of trading, commercial nature expect with the permission of RBI by a resident outside India

9) Restriction on practicing a profession in India by foreign national expect the permission of RBI

Foreign Exchange management Act (FEMA), 1999

FEMA bill was introduced in august 1998 & adopted in 1999. it is applicable to whole of India.

Main terms in FEMA1) Person : under section 2(u) person include• an individual• a company • A firm• An association of persons or body of individuals

2. Resident : Resident means a person residing in India for more than 182 days in the preceding financial year. It not include the person who has gone out of the India for employment, business or with the intension of permanently setting outside the India. It also not include the person who has come to India for travel or visit.

3. Current account transaction : (Section 5) Such transaction include • income from foreign investment• interest on external loan• remittance of living expense of spouse, children or parent residing outside• expenses for foreign travel, education, medical care FEMA allows current account convertibility without the permission of RBI but in public interest govt. can impose some restrictions.

4. Capital account transaction : Include transaction which alter the assets or liabilities :a) Outside India, of person residing in Indiab) In India, of person residing outside India Main objectives1) To amend the restrictive law relating to foreign exchange2) To manage current account & capital account transaction 3) To facilitate external trade by Indian4) To ensure free flow of capital5) To develop & expand foreign exchange market in India6) To redress dispute related to foreign exchange transaction7) To provide suitable economic environment for globalization

Main provision of FEMA

1) Definition of Resident - Section 2(5)

2) Management of foreign exchange – Section 3

3) Provision relating to export of goods & services Section7(1) of the act says every exporter of the good

has to :a) Furnish with RBI or with any other authority for the purpose, a

declaration has to be given describing the full value of the goods to be exported.

b) Furnish other information to the RBI which may be required for the purpose for ensuring the realization of export

4) Provision relating to current & capital account transactions : section 5 of the act says that person can sell or draw

foreign exchange only through authorized person from the current account.

Section 6 (1) of the act says that person can sell or draw foreign exchange only through authorized person from the capital account transaction where govt. may specify :

a) Any class of the account transaction which is permitted b) The limit upto which the foreign exchange be admissible

Section 6(3) of the act provide that RBI can impose strict regulations or prohibit any of the following transactions :

c) Transfer or issue of foreign security by Indian residentd) Transfer or issue of foreign security by person resident outside

India

c) Any borrowing or lending of foreign exchanged) Any borrowing or lending in Indian currency between Indian &

foreignere) Any export, import or holding of currency

5) Repatriation person Section 8 of the act says any person who has to receive

any amount from abroad has to take the necessary steps according to the mode prescribed by RBI

Section 9 of the act provide exemption regarding applicability of repatriation provisions. The provisions are :

f) Possession of foreign currency up to the limit by RBIg) Holding the foreign currency as specified by RBIh) Foreign exchange earned through employment, business,

service & gift up to the limit specified by RBI

6) Authorized person – Section 10

7) Provision regarding Contravention & penalties – Section 13 & Section 14

8) Provision relating to adjudication & appeals – Section 16

9) Appeal to special director – Section 17

10) Appeal to appelate tribunal – Section 18

11) Appeal to high court

12) Directorate of enforcement – Section 6(A)

New EXIM policy 2004 – 2009 The EXIM policy was announced on August 2004. the main objective of this policy is to use foreign trade as a instrument for economic growth.

Objectives

1) To double the %age share of world trade in next 5 years i.e from 0.8% in 2003-04 to 1.8% in 2008-09

2) To use foreign trade as a instrument for economic growth3) To eliminate control & to create an atmosphere of trust in

foreign trade sector4) To simplify the procedure, forms & documents of foreign trade

Main provision of the policy

1) Facilities for agriculture sectora) Import of capital goods for agriculture sector will be duty freeb) The import of seeds & planting material are liberalized to

increase yieldc) Increase in export of medicinal & herbal plant

2) Facilities for gems & jewellery industry :a) Duty free import of machinery, consumable metals, metal scrap,

used in jewellary for melting, refiningb) Duty free import of commercial samplec) Duty free import of gold under the condition that export of

equivalent jewellary is made

3) Facilities for handloom & handicraft industrya) Duty free import of capital goodsb) Setting up of handicraft export promotion councilc) To increase export award such as town of export excellence has

been set up

4) Providing more facilities t SEZs In these zones international quality infrastructure has

been set up. The SEZs bill has been passed by the govt. in 2005.

5) Categorization of star export houses Under this scheme one to five star are awarded on the

basis of total export in current & preceding year. On achieving export of 15 crore one star status is given & on achieving the target of Rs 5000 crores or more status of 5 star is given. Such export houses get the exemption from bank guarantee, tax concession & easy clearance of document from govt. offices

6) Special concession for export oriented units (EOUs)a) EOUs will be exempted from service tax to promote exportb) Duty free import of capital goodsc) Duty free import of raw material

7) Setting up free trade & warehousing zones (FTWZs) In this scheme 100% FDI is allowed for setting up

warehousing zones. Each zone will have the outlay of 100 crores & built up area of 5lac sq meters. In these zones duty will not be charged on export & import transaction. All the benefit of SEZs will be received by these FTWZs.

8) Procedural simplificationa) No need to furnish bank guarantee of Rs 5 crores for exporterb) All licenses relating to foreign trade will be valid for 24

months

c) Only 10% of goods meant for export will be physically examined

d) Reduction in nos. of forms & simplification of form

9) Other provisione) Promoting India as a hub of auto componentf) Entering into free trade agreement various other country

Positive aspect1. Increased competition2. Improved quality standards3. Development of service sector4. Employment generation5. Technology development6. Liberal import

Negative aspect1. The removal of protection measure provided to domestic

players has provided threat to their survival2. Simplified import o technology has discourage the research3. Most of incentives & concession given to foreign player is

misused by them creating the monopoly4. Provision has not made to boost export of manufacture goods

The Competition Act, 2002 After the introduction of Globalization & liberalization in India, Indian industry start facing the competition from within & outside world. In the newly emerged condition MRTP act has become outdated in certain aspect, so in 1999, govt. appoint a committee on “competition policy & law”. This committee submit its report in 2000 & on the basis of this report The Competition act 2002 was passed. This act replaced MRTP act. Competition commission of India (CCI) has been set up which replaced MRTPC. All the pending cases of MRTPC are shifted to CCI This act is applicable to whole of India expect the state of J&K.

Objective1. To prevent practices having adverse affect on competition2. To promote competition in market3. To protect the interest of consumer4. To ensure freedom of trade in Indian market

Competition act is not applicable in following cases5. Banks6. Foreign institutional investor7. Public financial institutions8. Agreement regarding intellectual property rights such as trade

marks patent, copy right etc9. The central govt. may exempt any class of enterprises from the

provision

Prohibition in this Act1. Anti – Competitive agreements (section 3) All the agreement which has adverse effect on

competition in India are declare void. Those agreement are a) Limits or control production, supply, technical development,

investment etcb) Restrict sharing of the market by allocation of geographically

area or type goods or type of consumerc) Manipulate the process of biddingd) Tie-in- agreement i.e agreement requiring a purchase of

goods to purchase some other goods along with ite) Exclusive supply agreementf) Exclusive distribution agreement

2) Abuse of dominant position (section 4) Dominant position means position of strength

enjoyed by some person that affects its competitors or consumer, if any enterprise is enjoying such position then such position should be abuse. Such condition are :

a) Impose unfair condition on purchase or sale of goods or serviceb) Limit or restrict production or technical development

3) Regulation of combination (section 5) Combination include acquisition, mergers. The

following limits apply for determining whether a combination is subject to type

a) Any combination, merger which result in combined assets of more than Rs. 1000 cr. Or combined turnover more than Rs. 3000 cr in India

b) If business is carried outside India, then combination which result in combined assets of more than 500 million US dollars or combined turnover more than 1500 million US dollars

c) If any merger is done in India by a group, if combined assets of group is more than Rs. 4000 cr or combined turnover more than Rs. 12000 cr

d) If any merger is done by any enterprise or group which has business in India & abroad, has combined assets of more than 2 billion US dollars or combined turnover more than 6 billion Us dollars

If any combination above type is to done then for that approval from CCI has to taken.

Competition Commission of India (CCI) The competition act set up statutory body named CCI which take over MRTPC. Complaints lodged with MRTPC are handed over to CCI for settlement

Structure & working of CCI1. Members (section 7,8,9,10,11)

2. Appointment of Director General (section 16)

3. Duties of CCI (section 18)i. To eliminate practices having adverse effect on competitionii. To promote competitioniii. To protect the interest of consumer

4. Powers & Function of CCIi. Inquiry into anti –competitive agreement & abuse of

dominant position (section 19)ii. Inquiry into combination which has adverse effect on the

competition (section 20)iii. Power to give interim relief(section 33)

5. Execution

6. Appeal

7. Penaltiesi. Contravention to the order of the commission(section 42): Imprisonment up to 1 year & monetary

penalty not exceeding 10 lakh

ii. Failure to comply with the direction of commission & director general (section 43)

Rs. 1 lakh for each day for which failure continues

iii. For making false statement (section 44) Not less than Rs. 50 lakh extending to to rs. 1 crore